QoE over RoE

ROE is a derivative of the Balance Sheet and Profit and Loss statement, an important metric, which along with the Cash flow statement must be studied for long term investing decision, over the heavy emphasis on Profit and Loss statement. QOE (Quality of Earnings) trumps other metrics but there isn’t a ready made formula.

“If the company were a person, Cash Flow statement would be the index of his habits, Balance Sheet the stock take of his character and Profit and Loss statement his day to day activities.” – Feeling poetic, quoteic here.

So, don’t be fooled from the day to day activities (P&L), a person may be visiting liquor store daily before work for reasons not at all related to alcohol addiction.

When you analyse a company to hold for the long term you need to look at dozens of things or hundreds if you have an elaborate checklist. Whilst I do that, I don’t like to boil it down to formulas like Altman Z scores and the like.

Analysing numbers can give you reasons. You need to stay with the questions longer to get the answers, not surprised that Einstein said he found more answers while doing menial chores than sitting on his table.

The properties of earnings have changed dramatically over the past 40 years. Prior studies interpret this trend as a decline in earnings quality but disagree on whether it results from changes in the real economy or changes in accounting standards. I find that each new cohort of listed firms exhibits lower earnings quality than its predecessors, mainly because of higher intangible intensity

An intangible-intensive firm is likely to display high volatility in its revenues and cash flows because intangible investments carry higher uncertainty about future benefits than do tangible investments. By the outset of the twenty-first century, the United States had moved from being primarily an industrial economy to becoming mainly a knowledge-based economy. As a result, U.S. firms have increased their investments in intangible capital such as innovation, advertising, information technology, human capital, and customer relations.

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Amit Arora

B.Com(Hons) Gold Medalist - Delhi University, MBA.

Served United Nations between 2001-2006 in Europe.

Since 2007 consultant for Inland Revenue, Ministry of Economic Development, Ministry of Social Development, Ministry of Justice, Ministry of Business Innovation and Employment (NZ Govt. Organisations).